How a Client’s Audit Went from a Nightmare to a Success

This January I met a new client who received a notice from the IRS with intent to levy their bank account in the amount of $160,000. Naturally, the threat of levy and an audit would be a scary experience for anyone. In this particular case, the penalties alone amounted to over $15,000. eeCPA, PLC saved this client $145,000, making this our most successful audit to date.

Here are some lessons to be learned from this audit:

· Make sure your company is organized properly. My client’s company was originally organized as a Sole Proprietorship, which was the wrong entity for her business. We reclassified her business as an S-Corp, which significantly reduced her taxes.

· Attention to detail. Be sure to track all your expenses, especially auto and home office expenses. When you track your expenses properly, you will be able to achieve greater savings. In this case, the former tax preparer failed to account for the client’s credit card expenses. That is why we need all of your statements for all accounts.

· Intent to levy= close your accounts. When a client receives a notice of intent to levy, panic is often the first reaction. When my client received the notice of intent to levy her account, I advised her to close her bank accounts immediately and open accounts at other banks. She followed the advice and avoided the levy.

· Make sure payroll expenses are accurately stated. My client’s payroll expenses were understated. That is why we always take the time to perform a reconciliation of all of our client’s payroll expenses. We automatically include the payroll reconciliation with our service, which you cannot find from any of our competitors.

· Use eecpa! If you are facing an audit, we can help you save significantly. In the case of this audit, we saved our client more than 10 times our fee!

Reminder: Final Deadlines for 2009 Tax Returns Looming

Just a reminder- the deadline for S-Corp, C-Corp, fiduciary, and partnership tax returns is due September 15, 2010! In order to have your returns filed timely, we must have all your documents in our office by August 15, 2010.

The deadline for individual income tax returns is October 15, 2010. We must have all your documents in our office by September 15, 2010, in order to timely file your returns.

Please contact us if you have any questions!

New 1099 Reporting Requirements Could be the Kiss of Death for Small Businesses

The Patient Protection and Affordable Care Act passed in March 2010 includes a provision that dramatically changes the 1099 reporting requirements for businesses. The new law effective January 1, 2012, now requires businesses to report ALL purchases of BOTH GOODS and SERVICES from ANY vendor which total over $600 per year. Did your business purchase 10 tanks of gas? A new computer? An airline ticket? According to the new law, all of these purchases are now reportable.

Do you buy gas at Shell? Do you think that you have filled up more than 12 times at the Shell on the corner? If you pay for gas with a debit card, then you may have to issue Shell a 1099… Can you imagine having to go into the convenience store and asking the minimum wage clerk for the exact address, legal name of the station, and Taxpayer Identification Number?

The new requirements are completely misdirected at the wrong target. Rather than improving the tax gap from individual to business transactions, the new law targets business to business transactions. Not to mention, the effects of the new reporting requirements would create an administrative maelstrom and would have a devastating economic impact on small businesses. Here are the biggest issues with the new law:

· Complete overhaul of current accounting systems. Accounting systems in use today are not set up to segregate payments by vendor and method. Modifying the accounting software could be more costly in administrative burden and expense than the Y2K conversion.

· Filing Costs. With the new law, business and government agencies are expected to file more than 250 information returns through the IRS FIRE system, a special software designed for large businesses. Most small businesses do not have access to the IRS FIRE system and will have to outsource the filing to data processing companies who typically charge $3-4 per form.

· Accuracy. Forms 1099 cannot be prepared without federal identification numbers, legal business names and legal addresses. The current on-line Taxpayer Identification Number matching program will be inadequate because the filer does not have the complete information. Providing the complete information will increase the risk of fraud and identity theft. Additionally, many issues remain unclear about who the recipient of the 1099 should be. For example, you, the employer reimburse an employee for a business purchase. Would you issue the 1099 to the original vendor or to the employee?

· Meeting the Deadline. The above named issues subject businesses to making several errors on the information returns, which can be costly. Even if you filed error-free information returns, you still have to meet the January 31^st deadline, which is the same deadline as payroll reports. This adds a greater burden to small businesses.

· Exclusion of Credit Card Payments. The new law will exclude credit card payments from the reporting requirements, which will force businesses who do not take credit cards to do so. Businesses will be forced to incur additional fees to process simple transactions. Many new businesses do not have the credit rating to qualify for credit card payments and will be forced to follow the reporting requirements.

Despite the long list of obvious issues with this regulation, the biggest concern with the new law is that it will cost businesses as well as the IRS at least 100 times more than the previous information reporting requirements.

To avoid the administrative nightmare and devastation to small businesses, speak out! Contact our elected representatives in DC!

IRS Releases Form W-11 for Employers to Claim Credit from HIRE Act

In March, Congress passed the HIRE Act, which benefits employers who hire previously unemployed workers this year. As we reported in May, employers who qualify are eligible for a 6.2% payroll incentive, which can save you a lot! In order to qualify for the incentive, employers must have the new hire fill out Form W-11. Form W-11 confirms the new hire’s previous status as unemployed. Employers need to retain the Form W-11 with their payroll and tax records .

Make this a part of your new hire packet. Along with having them complete their initial application and tax withholding elections, have them complete Form W-11.

Make sure you give Form W-11 to your payroll processer to be sure that you get this credit.

In this tough economy, every penny counts. Our clients have already saved thousands of dollars!

Take Advantage of the Summer Downtime and Reevaluate Your Business

It’s that time of year again. Every day the temperature is a predictable triple digit number and Phoenix seems to be a ghost town. Just because summer is here does not mean business has to slow down for you. In fact summer is the perfect opportunity for you to reevaluate your expenses for the year, set goals for your company, and review your employees’ performances. Here are a few suggestions on how you can take advantage of this downtime and make sure your business thrives in the coming year.

· Get new quotes from your vendors! Take a look at your expenses from this year and request new quotes from your vendors. This is the perfect time to examine everything from insurance premiums, internet services, rents, landscaping, etc. If your current vendors cannot offer you a better rate, then investigate other options. Your customers are putting pressure on you right now-remember you’re a customer too! Put pressure on your vendors and seek relief!

· Reevaluate your marketing plan. Devote some time to research different marketing plans. You can trim your expenses by cutting out archaic marketing techniques such as advertising in the yellow pages.

· Examine your retirement plan. Now is the perfect time to evaluate your retirement plan to see if you need to make any modifications. Converting from a 401k plan to a SIMPLE IRA plan may save you more than $1,500 in administration fees. SIMPLE IRA plans have no annual filing requirements, which is an excellent option for business looking for leaner expenses. The deadline to set up a SIMPLE IRA or safe harbor 401k is October 1, 2010.

Feel free to give us a call if you have any questions!

Fannie Mae Announced Sanctions for Struggling Homeowners for Strategic Defaults

Fannie Mae recently announced sanctions against homeowners who strategically default on their mortgage, making them ineligible for Fannie Mae mortgages for seven years. A “strategic default” is defined when a homeowner did not work in good faith to avoid foreclosure and has as the ability to pay but chooses to walk away when the value of the home is less than what is owed.

Fannie Mae also announced that they would seek “deficiency judgments” against homeowners in court to recover debt by seizing borrower’s other assets. Since Arizona is a non-deficiency state, this threat does not hold much clout against Arizona homeowners.

The Wall Street Journal recently reported that nearly one in five mortgage defaults in the first half of 2009 were considered strategic. Fannie Mae’s recent decision attempts to curb homeowners from forcing foreclosure to pursue other alternatives such as a lender-approved short sale or formally giving up the deed.

Analysts question whether the aggressive Fannie Mae sanctions will have a positive effect on the housing market. The plan clearly challenges the Obama administration’s policy of stimulating the fragile housing market.

Furthermore, Fannie Mae’s policy might be impossible to execute. The task of distinguishing between intentional defaults and homeowners who had no other options will subject Fannie Mae to scrutiny. Additionally, Fannie Mae’s pursuit of deficiency judgments is economically inefficient since there is no tax liability on forgiven portions of home mortgages until 2012.

Whether or not Fannie Mae will be able to execute the new policy is to be determined. However, the policy draws one important question: will the housing market improve with decrease of mortgage defaults, especially with a decline in unemployment or do home prices need to appreciate before the market can improve? Time can only tell.

Health-Care Overhaul Imposes Wealth Taxes, Makes Roth IRA Conversions More Attractive

Last March Congress passed the landmark Patient Protection and Affordable Care Act. This radical policy forced many critics to ask “How is the government going to pay for this?” The answer to this million dollar (or $1 trillion according to the Congressional Budget’s Office’s projection) question? The health-care overhaul will impose two new taxes on earnings: 1) an extra 0.9% levy on wages for couples earning more than $250,000 (or $200,000 for singles) and a 3.8% tax on investment income for the same group. How could these taxes affect you?

Let’s say you and your spouse both earn $150,000, combined income is $300,000. In 2013, you will owe an extra 0.9% on the excess earnings over $250,000, or $450, in addition to your regular Medicare tax because your combined wages are above $250,000.

How will your investment income be affected? First of all, let’s define investment income. Investment income includes, interest, dividends, rents, royalties, captain gains in addition to the taxable portion of insurance annuity payouts (unless it is from a company pension). All of these types of investment income are subject to the 3.8% tax on amounts over the $250,000 (or $200,000 for single filers) threshold. For example, if you earned $60,000 a year, but have an investment income of $180,000, your total income is $240,000 and you are subject to additional tax. Because your investment income is $40,000 over the $200,000 threshold, you would owe $1,520.

How can you minimize these taxes? Essentially, your investment income is subject to the new tax when it increases your adjusted gross income. While social security and pensions are not investment income, they still raise your AGI. Here are some suggestions on how you can avoid increasing your AGI.

· Roth IRA conversions. These are an excellent option because they do not raise AGI and are not considered investment income.

· Defined-benefit pensions. If you are in a small business or have consulting income, pensions could be a good fit. Pensions are not investment income and you can contribute more with age.

· Installment sales if you are selling assets. If you are spreading out the income, you would minimize the tax.

· Life Insurance. If you purchase a policy, you could borrow from it and settle before death. You can avoid income tax on investment gains within the policy.

For more information, check out this article from the Wall Street Journal or give us a call!